Silver Insights Series: The Leverage of Silver Stocks Vs. The Silver Bar

We launched the Silver Insights Series in June to provide investors an analytical edge when investing in silver and silver mining stocks.

In our first volume of the Silver Insights Series we mapped out the last bull run in silver: August 2010 to April 2011.  A period where silver outperformed gold by a very wide margin.

However silver mining companies weren’t able to outperform the underlying silver bar during that bull run, a disappointing outcome for silver mining investors.

In Volume 2 we examine the current year-to-date performance of silver miners and highlight key quantitative fundamental drivers in the sector.

Silver Miners Outperforming the Silver Bar Year-to-Date

The Global X Silver Miners ETF (NYSE:SIL), a targeted play on silver mining companies, is up 29% YTD. In comparison the iShares Silver Trust (NYSE:SLV) which tracks the silver bullion price is up 10% YTD.

It’s been a very good year for silver mining investors, this is the relationship that investors want to see – getting rewarded for the inherent operational and financial leverage of the mining companies.

Of the top 10 North American holdings, 6 outperformed the Mining ETF. Wheaton Precious Metals (the largest silver mining company) led the pack, up 66% YTD – a clear indicator that large institutional money flows were a big part of the investment thesis in silver mining stocks.

Of the remaining 4 under-performing stocks, only First Majestic and Coeur Mining performed worse than the silver bar, down -9% and -17% respectively.

The breadth of strong performance in the the silver mining sector has been impressive, something that investors didn’t see in the last silver bull run.

Where’s the Opportunity? Silver Stocks that Mine Silver!

Silver mining companies are an odd lot, it’s a sub-sector where most firms in the category don’t actually have a majority revenue/mining exposure (over 50%) to the underlying metal itself.

If market is entering a raging bull market for silver, investors should want to own stocks that mine silver! Capital 10X ranked the silver mining ETF by exposure to silver, the top 5 companies had an average silver mining exposure of 58%.

That compares to the silver exposure in the overall ETF of 42%, a very big difference. Of greater interest, the enhanced silver exposure of the Top 5 names has the same P/CF as the ETF: 13X.

In terms of what screens the best, we’ve identified Division 1 stocks (best value) and Division 2 stocks (second best value).

The quantitative scoring hierarchy for the screen is as follows:

1. Silver exposure (100% exposure = 2 points)
2. Gold mining exposure (100% exposure = 1 point)
3. Silver developer (0.5 point)
4. Cheap valuation vs. index (0.25 point)

Division 1 – Silver Mining Stocks

• Mag Silver (NYSE:MAG, TSX:MAG):  Mag has the highest exposure to silver in the group, this is through it’s development asset in Mexico – Juanicipio, a joint venture with Fresnillo.
• SilverCrest Metals (NYSE:SILV, TSX:SIL): Silvercrest scores well due it’s mix of high silver exposure and development. The company has four development projects in Mexico, with their Las Chispas project in the most advanced stage.
• Fortuna Silver (NYSE:FSE, TSX:FVI): Fortuna is an established silver producer with mines in Peru and Mexico. The company had the lowest price-to-cashflow in the group at 5x.

Division 2 – Silver Mining Stocks

• First Majestic Silver (NYSE:AG, TSX:FR): First Majestic has the 2nd highest exposure to silver in the group, the company has three producing silver mines in Mexico.  The stock has underperformed both the silver ETF and the metal YTD.
• Silvercorp Metals (NYSE:SVM, TSX:SVM): Silvercorp is a silver producer operating mines in China. The company has above average silver exposure, however trades at one of the highest multiples in the group at 20x price-to-cashflow.